Site-value tax easier to implement and better for economy

OPINION:A good property tax is about getting land used well and financing local services and amenities

A RESIDENTIAL property tax in Ireland is a key part of fixing the gap between public spending and public revenues. Last week, as part of the ESRI’s Renewal series, Claire Keane, John Walsh, Tim Callan and Michael Savage published Property Tax in Ireland: Key Choices, outlining how a property tax might work and the effect it might have.

They recommended an annual tax on owner-occupied residences (but not rented properties) based on the full value of the property, with exemptions for those below certain income thresholds.

There are a number of concerns with this proposal.

Firstly, there should be no ongoing exemptions from a property tax, only deferrals. For those who are property-wealthy but income-poor (such as older couples) the State can wait until they ultimately sell the property and then take the fair amount.

It’s also possible to ease the burden on those who bought at the peak through a transitional arrangement such as tax credits against their property tax bills that must be used by 2020.

The problem with income- based exemptions is that they turn a property tax into something suspiciously like an income tax. Income tax and VAT are indiscriminate revenue raisers, which is why people care about whether they are progressive (Ireland’s income tax system is among the most progressive in the world, with the top 10 per cent of earners paying 40 per cent of income tax) or regressive (Ireland’s VAT system is very regressive, hitting poorest households the hardest).

Every other form of tax or public charge, from cigarette duties to water charges, is designed to help society use its scarce resources well. A good property tax is a cross between a wealth tax, a means of funding local services and a tool for making sure land is used well.

The ESRI researchers opted for a tax on the full value of each property, rather than just the site value, even though a site-value tax – specified in the last two programmes for government

and the memorandum of understanding with the EU and IMF – would both be easier to implement and better for Ireland’s economic recovery.

A full-value tax punishes people for making their homes more energy-efficient, for building an extension or, indeed, improving their property in any way that would increase its value.

A site-value tax encourages you to use your plot of land in socially beneficial ways.

Another major drawback of a full-value tax is that it would encourage people to sit on land rather than use it. Conversely, a site-value tax encourages owners of derelict or vacant sites to use them, sell them or else pay the rest of society for the privilege of wasting valuable land.

Perhaps most crucially, given parlous public finances, it is far easier to estimate site values than full property values. Indeed, I’ve already estimated the contours of land value in Ireland, a dataset and model I’m happy to share with any government body. Put at its simplest, the value of the site you live on depends on just two factors: the site size (known from the Land Registry) and the value of land in your area, which can be measured easily through what economists call “fixed effects”.

On the other hand the full value of the property you live in depends not just on site size and land values, but also on dozens of other factors such as the number and size of bedrooms, bathrooms, other rooms and outhouses, all the way down to whether the attic is converted.

The forthcoming register of house prices will give none of the information needed to estimate the value of these attributes.

The country will be depending on people like me to estimate hundreds of things like the effect of double-glazing on the value of terraced properties in Connacht-Ulster since 2009.

We are in the paradoxically lucky position of being able to design a property tax from scratch. Thus, we need to bear

in mind “cause and effect”. In other words, why do we want a property tax and what effect will it have? Clearly the “why” is in part about revenue – but if that’s all it is we could just increase income tax. A well designed property tax is about getting land used well and financing local services and amenities, which ultimately drives differences in land values around the country.

A full-value property tax with income exemptions is just income tax in another form, an indiscriminate form of revenue raising that will damage Ireland’s competitiveness and punish useful activities like building on a derelict site.

A site-value tax, with deferrals for those who have the wealth, but don’t have the income, will generate the same revenue but also encourage Irish households to use land, a scarce commodity, in socially beneficial ways.